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Perspective

Subrogation

If you have been involved with an insurance claim or a contract negotiation of any nature, you have undoubtedly come across the term “subrogation”. But what is subrogation? When does subrogation occur? And how does subrogation impact my business?

What is Subrogation?

Subrogation is a recovery mechanism by which an insurer can recover funds that it has paid out to an insured by bringing an action against the responsible party.  In layman’s terms, subrogation occurs when an insurance company pays a claim and “steps into the shoes” of the insured and makes a claim against the third party who may have caused the loss, insured the loss, or contributed to the loss.

For example, suppose your company owns a single tenant retail building. You have insured the building under a commercial property policy on a replacement cost basis. One evening a fire breaks out and causes significant damage to the interior and exterior of the building. It is determined the fire was caused by a smoldering cigarette the tenant left in the trash can. Your property insurer will indemnify you for the damage to your building and may try to recover (subrogate) the amount it paid to you by suing the tenant.

When can the Insurer Subrogate?

The right to subrogate occurs when the Insurer has indemnified the insured for a loss. It is at the insurer’s discretion as to whether to subrogate a claim – NOT the insureds. It is important to remember that not all claims are fit for subrogation. In some circumstances, pursuit of subrogation is simply not worth the insurance company’s time or expense.

Impact of Subrogation

The quantum and frequency of past claims plays a large role in determining future premiums. The mechanism of subrogation can assist with an insureds claims experience. Once a claim is successfully subrogated against a liable third party, the amount of which was recovered will be removed from your claims experience and should not factor into your future premiums. The insurer’s subrogation action will also include any deductible paid by the insured. Using the above example, if the insurer paid $1M for your damaged building and later recovers $1M from the tenant (and also any deductible paid), the net claim on your record would be nil and will not have an adverse impact on future premiums.

Subrogation is just one of the countless insurance concepts that can impact a company. We suggest you contact an experienced risk and insurance consultant to walk you through the various mechanisms within contracts and insurance policies to ensure you are adequately aware of all contractual risks and insurance obligations.

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